New research report on student loan repayment and broader household borrowing

Student loans make up an increasing share of the debt held by borrowers around the country, particularly for younger borrowers. Our previous research has shown that borrowers vary greatly in their ability to pay off their loans, how quickly they can do so, and the potential hurdles they face. Today, we released a new Data Point report providing a closer look at borrowers’ use of credit as they approach and make their final student loan payments, and in the months that follow.

Looking at how borrowers pay off their student loans helps us understand how households manage their finances over time. The patterns we see highlight the interconnected nature of borrowers’ finances, as repayment of one type of debt affects payments and borrowing on other types of debt. This research can help us better predict the impacts new policies or products may have on homeownership, credit card use, and the broader economy as a whole.

As background, the typical student loan has a term of ten years, with equal monthly scheduled payments. However, borrowers can pay the loan off early at any time by using savings, gifts, or other resources, or by refinancing with a new loan. Our analyses focus on how borrowers first pay off a student loan and what happens next.

Key findings include:

Most borrowers paying off a student loan do so before the final payment is due, often with a single large final payment. The median final payment made on a student loan is 55 times larger than the scheduled payment (implying a payoff at least 55 months ahead of schedule), with 94 percent of final payments exceeding the scheduled payment and only 6 percent of loans paid off with the final few payments equal to the scheduled payments. Even among loans within five years of their scheduled payoff date, for which refinancing is uncommon, the median final payment is more than seven times larger than the scheduled payments made immediately prior.

Borrowers paying off a student loan early also reduce their credit card balances and make large payments on their other student loans at the same time. In addition, these borrowers are 31 percent more likely to take out their first mortgage loan in the year following the payoff than in the year preceding the payoff. While this is evidence of a link between the timing of student loan payoffs and home purchases, the simultaneous reduction in credit card and other student loan balances suggests that increased wealth or income may influence when borrowers pay off student loans, reduce credit card balances, and purchase homes.

The smaller share of borrowers who pay off their loan according to the scheduled payments pay down, rather than take on, other debts in the months following payoff. Paying off a loan reduces borrowers’ monthly payment obligations, and those with additional student loans put 24 percent of these savings toward paying down those other student loans faster. Borrowers also use 16 percent of the drop in their required payments to reduce credit card balances. Unlike for borrowers paying off a student loan early, those paying off on schedule are not more likely to take out a mortgage for the first time.

Taken together, this new research suggests that when borrowers approach their final student loan payments most prefer to, and are able to, pay off the loans in full with a single large payment. The timing of this payment coincides with a broader reduction in existing debts and is followed by increases in home purchases. However, for those borrowers who are unable to, or choose not to, pay off their loans early, the reduction of other debts that follows their final payment suggests that their required monthly student loan payments constrained their ability to pay down these other debts.

Understanding why so many borrowers use large lump sum payments, rather than gradual increases in monthly payments to pay off student loans, could help us better predict how the student loan market evolves as a whole, and warrants additional research. Our new findings suggest that the timing of many student loan payoffs may be determined by life events such as household formation or jumps in income or wealth, though transaction costs, rules of thumb, or inertia may also play a role.

Finally, while this analysis focuses on student loan borrowers who are successfully paying off their loans, similar approaches could be applied to the large population of student borrowers struggling with rising balances, delinquency, or default. Such research could shed light on how borrowers use other credit products to cope with their student debt, how their access to other credit may be inhibited, and how available repayment plans and other programs change these outcomes.